Personal care company The Honest Company (NASDAQ:HNST) reported results ahead of analysts' expectations in Q2 CY2024, with revenue up 10.1% year on year to $93.05 million. It made a GAAP loss of $0.04 per share, improving from its loss of $0.14 per share in the same quarter last year.
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The Honest Company (HNST) Q2 CY2024 Highlights:
- Revenue: $93.05 million vs analyst estimates of $87.09 million (6.8% beat)
- EPS: -$0.04 vs analyst expectations of -$0.05 (in line)
- Raised full year guidance for revenue and adj EBITDA
- Gross Margin (GAAP): 38.3%, up from 27.7% in the same quarter last year
- EBITDA Margin: 8.2%, up from -4.8% in the same quarter last year
- Free Cash Flow of $2.93 million, up from $260,000 in the previous quarter
- Market Capitalization: $307.7 million
“This quarter, it is evident that our team’s commitment to our three Transformation Pillars of Brand Maximization, Margin Enhancement, and Operating Discipline is working, resulting in outstanding performance that has exceeded our expectations. In addition to delivering our highest quarterly revenue of $93 million in the second quarter, we continued to increase profitability and achieved gross margin of 38%. This strong performance and momentum give us confidence to raise our financial outlook for the full year,” said Chief Executive Officer, Carla Vernón.
Co-founded by actress Jessica Alba, The Honest Company (NASDAQ:HNST) sells diapers and wipes, skin care products, and household cleaning products.
Personal Care
While personal care products products may seem more discretionary than food, consumers tend to maintain or even boost their spending on the category during tough times. This phenomenon is known as "the lipstick effect" by economists, which states that consumers still want some semblance of affordable luxuries like beauty and wellness when the economy is sputtering. Consumer tastes are constantly changing, and personal care companies are currently responding to the public’s increased desire for ethically produced goods by featuring natural ingredients in their products.
Sales Growth
The Honest Company is a small consumer staples company, which sometimes brings disadvantages compared to larger competitors benefitting from better brand awareness and economies of scale.
As you can see below, the company's annualized revenue growth rate of 4.5% over the last three years was sluggish for a consumer staples business.
This quarter, The Honest Company reported robust year-on-year revenue growth of 10.1%, and its $93.05 million in revenue exceeded Wall Street's estimates by 6.8%. Looking ahead, Wall Street expects sales to grow 3.4% over the next 12 months, a deceleration from this quarter.
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Cash Is King
If you've followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills.
While The Honest Company posted positive free cash flow this quarter, the broader story hasn't been so clean. The Honest Company's demanding reinvestments have consumed many resources over the last two years, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 4.5%, poor for a consumer staples business.
Taking a step back, an encouraging sign is that The Honest Company's margin expanded by 19.8 percentage points during that time. Despite its improvement and recent free cash flow generation, we'd like to see more quarters of positive cash flow before recommending the stock.
The Honest Company's free cash flow clocked in at $2.93 million in Q2, equivalent to a 3.1% margin. The company's cash profitability regressed as it was 3.7 percentage points lower than in the same quarter last year, but it's still above its two-year average. We wouldn't read too much into this quarter's decline because investment needs can be seasonal, causing short-term swings. Long-term trends carry greater meaning.
Key Takeaways from The Honest Company's Q2 Results
We were impressed by how significantly The Honest Company blew past analysts' gross margin expectations this quarter. We were also excited its revenue outperformed Wall Street's estimates. Zooming out, we think this wasn't a perfect quarter, but it was certainly a solid one. The stock traded up 15.3% to $3.74 immediately after reporting.
The Honest Company may have had a good quarter, but does that mean you should invest right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.